Enlarging banking sector seen as risky

QUALITY, NOT QUANTITY:The central bank said that improving the quality of a nation’s financial intermediaries and financial industry could help maintain economic momentum

By Amy Su / Staff reporter

There are risks involved in blindly seeking to become a global financial hub by overdeveloping the banking sector, the central bank said yesterday.

The central bank issued a 12-page report on analysis of the recent Cyprus banking crisis, concluding with a warning on the risks of excessively developing a nation’s banking sector.

The possibility of launching mergers and acquisitions among state-owned financial institutions in Taiwan has sparked widespread debate recently.

SCALE

“When it comes to the scale of the financial sector, bigger is not necessarily better,” the bank said in the report.

The report attributed Cyprus’ economic problems to the overdevelopment of its banking sector, similar to the financial crises in Iceland and Ireland a few years ago.

Citing the predicaments of these countries, the central bank said that focusing national resources on becoming a financial center actually gives rise to extremely high risks.

“Raising the scale of a nation’s financial system may help drive up the economy in the short term, but it will also make the sector more vunerable to volatility,” the report said.

In addition, an excessively large financial sector may hurt a nation’s economic growth, the report said, citing research by IMF.

MAINTAINING MOMENTUM

In view of these uncertainties, the central bank said that a nation has to improve the quality of its financial intermediaries and the financial industry to maintain economic momentum.

Taiwanese financial sector representatives last month suggested that the government merge the eight state-owned banks into four to improve their competitiveness.

The much-discussed potential merger between the Bank of Taiwan (台灣銀行) and Land Bank of Taiwan (土地銀行), as well as another involving Hua Nan Commercial Bank (華南銀行), First Commercial Bank (第一銀行) and Chang Hwa Commercial Bank (彰化銀行), have been pointed out as possibilities.

Minister of Finance Chang Sheng-ford (張盛和) last week said that he had raised the issues with both central bank Governor Perng Fai-nan (彭淮南) and Financial Supervisory Commission Chairman Chen Yuh-chang (陳裕璋) in private, reaching a consensus to back the possible mergers among state-owned banks to raise operational efficiency.

However, the government has not yet started formal discussions on the mergers and acquisitions issue between state-owned banks, Chang said.